Why didn't anyone invite me to the party, why didn't I find out?
We are experiencing a phenomenon very similar to the stage of the Internet revolution of the years 1995-2000. Who could imagine in 2020, when the “.com” bubble was bursting, that today absolutely everything would be done on the internet, that companies like Amazon, Microsoft or Google would be among the 5 companies with the largest market capitalization in the world, or that Google it would even become a verb (googling). It was simply unthinkable. After having lived through the process in those years and having tried to be part of the party without knowing how, today I can see that these visionary geniuses like Bill Gates, Jeff Bezos, Elon Musk, Steve Jobs, Larry Page, Sergei Brin, Mark Zuckerberg among many others, imagined and created a world that for the rest of mortals was science fiction, it was the Jetsons, it was something that we simply weren't able to imagine, not even as famous companies of the time like Kodak and Blockbuster, to name just two known to all who went bankrupt.
Well, the interesting thing is that now it is happening again. Something of the magnitude of the Internet or much greater is happening right now and hardly anyone can understand it and most are not even aware that it exists. Just as there is Silicon Valley in California, which has been the center of knowledge and entrepreneurship of the Internet and related technologies, today there is Crypto Valley in Switzerland, with the city of Zug as its center.
It is difficult to understand this fascinating phenomenon with our current paradigms. With what we learned about how companies work, finance, valuations, speed in decision-making, how the stock market and the financial world work, and what are considered normal or acceptable numbers of growth, profits or profitability. How to understand that a cryptocurrency can go up 5% or 100% in one day; how can a digital asset increase its value by more than 1000% in one year. It is simply unthinkable in our current financial and trading world, where a 5% daily increase is unusual, a 10% a year profit is considered high and where 150% a year is considered insane.
What happens to us internally when we see that Bitcoin went from cost USD 6,946 on January 2, 2020, 15 months ago, something already seemed crazy to us, to USD 61,000 that is traded today April 17, 2021, just to name the best-known cryptocurrency . Well the answer is: distrust. Our brain simply thinks: it is too much to be true. How can a cryptocurrency like DOGE that has no fundamental support, that is useless, that was born as a joke, rise from USD 0.058 on April 5, 2021 to USD 0.36 as of today April 17 (in 12 days increase almost 7 times its value), it is simply incompressible to our brains, but it is happening, these are just a couple of real examples among many others.
Something very big is happening out there, in a world that we do not understand and that is being led by brilliant minds of less than 30 years old. Let's not cover the sun with a finger, let's try to understand it. As a result of all this, I have been studying and playing the game to understand how it is played, how to think in this new world, what is the new paradigm, validate how real it is, what part is speculation and what are the fundamentals behind. At the same time, I participate in the party a little and try to understand what it will be like in 3 years or more and see how it will affect the real estate industry in which today I participate as a technology provider (www.breal.cl).
Let's understand why money exists and how it works.
Imagine a world where money does not exist. People do not really need it, what they need are goods, food and services to be able to live. On the other hand, each of the goods and services that we consume, the same other people requires goods and services for its production, and so on until we reach the most basic raw materials such as copper, iron, oil, wheat, soybeans, seeds and others that are required to start the production chain.
Otherwise, at each stage of the production chain necessary to produce something, there are people who work in these companies and organizations, which in turn need to obtain the goods and services necessary to live. Well, it would simply be impossible to barter between products and services. As a solution we have money, which evolved from elements that were accepted by all as "currency" of exchange, such as gold, silver or salt. However, storing and transporting them made them unmanageable and impractical, thus emerging money in coins and later in cloth and paper bills. These were easier to transport and store. Then comes electronic money (transactions), plastic money (credit cards) and many other forms of money.
At the same time, each country has its own currency controlled centrally by the central bank of that country and a parity or price is established between one good and another through an exchange rate with the currency within each country, generally, defined by the supply and demand of each product. Therefore, we begin to see the concept of the "money network", which only serves to exchange goods and services within that country.However, just as each country has its own money network, there are within each network of that country, banks and financial entities that create sub-networks within the network, creating ecosystems that in turn talk to each other, forming the financial system that we use and know today.
Now, as each country does the same, each one has its own money network and sub-networks with their respective currency, thousands of networks are generated around the world, which in turn constitute other large money exchange networks such as ABA, SWIFT and global banks that lend money to countries and banks.
As you can see, today money moves from one network to another, from one country to another, from one bank to another, electronically. In each of these transactions, each time the money passes through a network, a bank or an intermediary charges a cost for the transaction. Well, this is our current financial system explained in simple terms, in short, many networks governed centrally and interconnected with the currency as an instrument of exchange.
So what is happening now?
What is happening is that each of these networks that we know are being replicated, but now in a "decentralized" way in networks called "blockchains" that regulate themselves. With our current paradigm, it is very difficult for us to understand that something as complex as a money network can regulate itself.
On this decentralized network or blockchain, transactions can occur without having a central entity that validates their veracity. The blockchain itself, which is nothing more than computer code that runs on thousands of computers or machines, is responsible for ensuring that each transaction is true, that whoever initiates the transaction exists and has the money, as well as that money passes to another person, which also exists, is valid and receives the money, knowing every second which person has each unit of currency. As this cannot be done with the current money known as Fiat, they invented cryptocurrencies and tokens.
With this logic, we are facing a brutal paradigm shift, with unsuspected consequences. We are going from living centuries in a world based on the centralization of everything (everything is controlled by an entity, a company, an institution or a government) to a paradigm where money and the electronic representation of goods and services (tokens), can be traded in a totally decentralized network called blockchains, that nobody controls, in which there are certain rules to ensure operation and robustness, and that also by its nature is inviolable from the point of view of security since the information is replicated in thousands of nodes or machines; so if a transaction is not validated, that is because each node needs to confirm the same information, if that doesn’t happen, it is rejected and the transaction does not occur.
This explains why today there are hundreds of new cryptocurrencies necessary to operate in the hundreds of networks, in a similar way, as each country has its own currency that allows to operate within the network of that country. In this way, a series of organizations and companies that today exist in the real world, but now in the new blockchain universe, begin to replicate. For example, if I move from one country to another I need to exchange my currency for the currency of the destination country to be able to pay and buy things, for this I must go to an exchange house or a bank to change a bill from one currency to another, or I have to use a credit card that accepts both currencies and that internally applies the conversion from one currency to another applying a cost for each transaction. Now in the blockchain world I can do the same but using a cryptocurrency that I can transport with minimal commissions from one country to another and change them in an Exchange or ATM to the Fiat currency of that country. There are even cryptocurrency debit cards that I can use anywhere.
We are in the presence of the creation of a new digital world, similar to what happened with the Internet, but on a much larger scale. When the Internet was born, no one was capable of imagining that our identities as people or the identity of companies would pass to the network, and that not being on the network would be like not existing. The Internet is also decentralized and has grown exponentially following the network effect. Well, in the new blockchain world it is similar.
On the other hand, there is another incredible phenomenon, “tokenization”. It is the representation of something in a digital unit, with an equivalent to a cryptocurrency to literally represent almost anything in its digital version and therefore to be able to trade it at the speed of light without borders or controls.
And, to continue surprising us, there are the “Smart Contracts” which are basically agreements between parties that are executed alone given the agreements defined in the contract. For example, a lease contract that charges the tenant for the rental amount on the agreed date, automatically pays the owner and the property manager without anyone doing anything, and if there are no funds in the electronic wallet, it does not allow the tenant to enter to the property. Like this example, there are thousands, especially in the financial world where crypto companies called DeFi (Decentralized Finance) have appeared that offer financial services such as paying you very high dividends for your cryptocurrencies or lending you crypto money with very low interest rates that are unthinkable in our traditional financial world.
Today the new companies of this new digital world obtain the funds they need by creating tokens and offering them in exchange for other universally recognized cryptocurrencies such as Bitcoin or Ether, in a similar way but not the same, as traditional companies create shares and sell them. The difference is that the shares entitle you to a part of the value of the company, even if you have many, to a position on the board of directors. However, tokens are generally a necessary input to operate within the network and do not give you ownership or decision-making rights within the company.
Otherwise, Exchanges such as Binance, Coinbase and many others were created to be able to exchange cryptocurrencies and tokens, creating a market that already exceeds a trillion dollars. By the way, a few days ago (April 14, 2021) Coinbase went public to be traded on the Nasdaq, being the first company in the crypto world to be formally accepted in the traditional financial world.
There are already statistics of new millionaires who are among the richest men and women in the world, who base their fortunes on Bitcoin, Ether and other cryptos, and they are usually around 25 to 35 years old, sometimes less. It is a new generation of millionaires who are emerging from nowhere and we are not aware that it is happening. They are guys who, for example, bought 100 BTC when it was worth USD 1,000 for a total of USD 100,000, which today is worth USD 6,300,000, and this has happened in the last 4 years and we never found out about this party. They are numbers that our brains, operating in a previous paradigm, do not know how to process and therefore reject them, they indicate that it is not possible, that it must be a lie or a passing exaggeration. However, this new world is real and it is happening now.
What issues and questions remain to be resolved?
The same thing has happened in all the revolutions that we have experienced as a society, and the one that resembles it the most and we already know how it evolved, is that of the Internet. For example, the way in which Internet companies were valued, in most cases has nothing to do with the income they generate. There are companies that have been sold for USD 10 billion and they do not generate income, they are nothing like the finance courses we learned in college.
Among the challenges that I see immediately are the following:
How are governments and central banks going to deal with cryptocurrencies that they cannot control and at the same time facing the fact that their own currencies are devalued?
How are governments going to collect taxes and if appropriate, for cryptocurrency transactions?
How to know which cryptocurrencies and how much of each one can have a person or company and where, in what part of the digital world they are located?
How are banks going to compete or transform themselves in the face of DeFi financial products that deliver returns 10 or more times higher without regulatory barriers or borders?
How will centralization-based accounting systems be adapted to record digital assets that exist in the cloud outside of local jurisdiction?
How will the laws of the countries be adapted to resolve discrepancies in a decentralized environment without country borders? How far can the current way of legislating go?
What new jobs and professions are being created?
How are colleges and universities going to adapt to be able to teach current generations the knowledge they require?
How are the relationships between parents and children who handle a language and paradigms that their parents do not understand?
How are governments and politicians going to deal with decision processes such as elections or others that occur in a decentralized manner? Imagine what would happen if on the blockchain 1 billion people agreed to remove a president of a country and take joint action at the same time?
How are countries going to deal with the growing polarization of knowledge and wealth between people?
While millions of people will be left without work, how will governments and institutions reconvert their citizens and give them tools and a space where they can coexist within the new hypertechnologized global ecosystem that is being created?
These and hundreds of other questions and their derivatives do not have clear or unique answers, opening an unknown and fascinating world of possibilities. The paradigm of decentralization and digitization at all levels, which is starting mainly in the financial world, opens up possibilities that go beyond our imagination.
I invite you to expand your minds and try to understand where this new world can lead us and become aware of the opportunities and threats that this new paradigm of decentralization leads us to face.
Roberto Anrique, CEO, BReal, www.breal.cl
April 17th, 2021